Public sector banks to ease MF loan terms conditionally

MUMBAI: Public sector banks have come together to reduce the acute liquidity problems being faced by several mutual funds. State-owned banks, which were earlier not accepting certificate of deposits (CDs) from some private and foreign banks as collateral for loans to mutual funds, have relaxed their stand. The banks have also agreed to lower the interest rate they charge to MFs.

In return, the banks have told MFs to park their surplus cash with state-owned, and not private, banks.At a meeting last week, state-owned banks assured fund houses they will accept CDs of all banks as collateral. In October, when the money market suffered its worst credit crunch in recent years, some PSU banks stopped accepting CDs from some private and foreign banks and extended loans to MFs only against CDs of other government banks. Though other state-owned banks did not change their practices, the move came as a shock to MFs, which were grappling with redemption pressures. Till then, the ownership of the banks issuing CDs had not made a difference. CDs are among the most liquid instruments in the money market.

In another move that could improve liquidity for MFs, banks have also agreed to buy commercial paper (CP) from MFs, though selectively. CPs are short-term, tradeable instruments that companies issue to raise working capital. Banks, however, have said they will purchase only CPs of triple-A rated corporates, and those floated by investment-grade manufacturing companies.

This means banks may, at least for now, refrain from buying CPs issued by non-banking finance companies and realty firms. As banks reduced their exposure to builders and finance firms over the last few years, they had turned to MFs for finance. In some countries, central banks have been directly buying CPs to help institutions and corporates stay afloat. Banks have also agreed to charge an interest of 11-11.5% for loans against CDs. The finance minister had advised banks to lower the current rate of 13-14% they were charging on loans to MFs. The pricing for CPs would be based on rates periodically announced by the industry body, Fixed Income Money Market And Derivatives Association.

On Friday, the benchmark three-month CP rate was 13.4%. At the meeting, MFs urged banks to further lower the interest rate given that the Reserve Bank of India (RBI) has cut rates and lowered the cash reserve ratio for banks aggressively.

Recently, RBI had opened a special window to give 14-day loans to banks at 7.5% against government securities, to on-lend the money to MFs.

Initially banks were charging 11% for such loans (against CDs) but later hiked the rate to as much as 14-15%. ���Now, the decision is not to make a killing from such lending, which is primarily meant to support MFs in a difficult time,��� said a bank head.